FAIS OMBUDSMAN DETERMINATIONS January April 2015

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1 FAIS OMBUDSMAN DETERMINATIONS January April 2015 Erika Elise Kruger and Impact Financial Consultants CC (1 st Respondent) and Michal Johannes Calitz (2 nd Respondent) Case No: FAIS 02504/14-15/NC 1 Johanna Petronella Carstens and Impact Financial Consultants CC (1 st Respondent) and Michal Johannes Calitz (2 nd Respondent) Case No: FAIS /15- WC 1 Martha Hendrina Carstens and Impact Financial Consultants CC (1 st Respondent) and Michal Johannes Calitz (2 nd Respondent) Case No: FAIS 03103/14-15/WC 1 All of the above determinations were against the same Respondent s. The facts of each of the above determinations were similar. The FAIS ombudsman went into detail regarding these series of determinations in the below case and in all of the other determinations referenced the below. Craig Steward Inch and Impact Financial Consultants CC (1 ST Respondent) and Michal Johannes Calitz (2 nd Respondent) Case No: FAIS /13- MP 1 Michal Calitz (2 nd Respondent) was the key individual and member of the 1 st Respondent. The complaint regarded the investment of monies into Relative Value Arbitrage Fund RVAF, which was a hedge fund. The RVAF fund experienced a highly publicised collapse which eventually led to the suicide of Herman Pretorius; the principal behind the fund. The RVAF fund went into liquidation. The caused the investors to want to withdraw their money from the fund in some instances and some had were sent letters informing them of the instance and that there monies were lost. The latter instance was what the Complainant experienced in the present matter. In the determinations for all of the above matters the following was pointed out: The duty to identify the client s needs was not adhered to. No financial needs analysis was done. In some instances there was not letter of engagement, fund fact sheet or brochure furnished. A needs analysis is a requirement in terms of section 8 of the General Code for Authorised Financial Services Providers and Representatives ( the Code ). Further the client s risk factors were not taken into account. In Mr Inch s case he did not want a high risk investment because he did not want to risk losing his life s savings. No record of advice (as per section 9 of the Code) was maintained to explain what other financial products were considered and

2 why the selected product was likely to satisfy the client s identified needs and objectives. The decision to place the majority of the complainants (in fact all of the complainants) savings into such a high risk investment without any diversification defies logic. In section 3 of the Code the provider is required to take into account the client s experience with financial products. (In some instances the Respondent s did try to use this as a defence but to no avail.) Disclosure requirements in terms of section 4 and 5 of the Code. The full details of the product provider and adviser were not disclosed to the claimants in all instances in writing. Together with information on the compliance department, details of the duties of each party or insurance details. Information on product supplier. All contact details of the supplier was not disclosed in terms of section 4 of the Code, including the contractual relationship with the product provider amongst other requirements. It is important to disclose the exact nature of the relationship. It was found that there was no separate distinction between the fund manager and a separate entity providing the administrative functions. Therefore it was found that the RVAF itself engaged in the provision of intermediary services on a discretionary basis and therefore it fell within the definition of Hedge Fund FSP (Board Notice 89 of 2007 defines a hedge fund FSP). The Code of Conduct for Discretionary Financial Services Providers. Section 5 and 8A of the Discretionary FSPs Code which relate to the mandates and duties of hedge fund FSP s, detail the necessary documents to enter into an agreement with a hedge fund service provider and, despite these requirements, there is not a single mention of Abante Capital (Pty) Ltd in any such documentation. Risk and hedge fund strategies disclosure as required by the discretionary code. The Code (section 8A) indicates that the client be appropriately appraised as to the risks inherent in, and processes and strategies followed by, the hedge fund but importantly that the client actually confirms such disclosure have taken place [Board Notice 571 of 2008]. Authorisation to conduct business as a financial services provider. In terms of section 7(3) an authorised financial services provider may only conduct financial services related to business with a person rendering financial services if that person has, where lawfully required, been issued with a licence for the rendering of such financial services. Neither Pretorius nor the RVAF itself was licensed in any way. There was thus a clear contravention of section 7(1), which led to respondent s contravention of section 7(3) in conducting financial services related business with a person

3 not so authorised. Section 8 (b) clearly requires that a licence must ensure that a reference to the fact that such a license is held is contained in all business documentation, advertisements and other promotional material. Yet there is not so much as a single reference on any documentation to the effect that Herman Pretorius, the RVAF or any other entity were so licensed. In this respect Calitz should have known that there was noncompliance with the Act, yet he proceeded to invest. Calitz response to the section 27(4) notice. He could not answer on what basis he found RVAF a suitable investment for his clients. He could not provide details of the due diligence done and what actually led him to conclude that the risk inherent in this product was suitable to the client s risk tolerance. Details that led him to believe that he was investing in a legitimate business enterprise. Calitz qualifications. He held a Post Graduate Diploma in Financial Planning and was a CERTIFIED FINANCIAL PLANNER professional and therefore he was held to a higher standard. The General Code of Conduct for Authorised Services Providers and Representatives. Section 2 of the General Code requires that a provider must at all times render financial services honestly, fairly, with due skill, care and diligence, and in the interests of the clients and the integrity of the financial services industry. Calitz did not adhere to this and seemingly turned a blind eye in favour of lucrative commissions. Commissions. Calitz maintained that he earned commission from his future profit share in Abante and it was not deducted from the particular client s investment. Yet he did earn a commission. This was in contravention of section 3(vii) of the Code. Not a single document sets out the commission or the method of calculation or the actual amount received. The Ombudsman found against Calitz in all of the above determinations. Maryke Marx (1 st Complainant), Petrus Marx (2 nd Complainant) and Wayne Ashley Gray (1 st Respondent), Gary Hilton Gray (2 nd Respondent), Quantum Leap Forex 181 (Pty) LTD (3 rd Respondent) Case No: SM-FOC The first respondent had a long term relationship with the complainants and had in fact acted on their behalf since The first respondent advised the complainant to withdraw their money from a non performing investment and to reinvest it into a forex investment. The advice given was during a routine visit to his clients. The complainant stated that the first respondent had briefly explained

4 the relationship between the second and third respondent s in relation to the investor. The first respondent mentioned to the complainants that they would earn a return of 3% per month and guaranteed to them that they would not lose more than 5% of their investment if things go wrong. The complainant s circumstances had changed at some point and they had decided to relocate. They sold their home and upon the advice of the first respondent they did not pay the proceeds into their new bond but rather invested it in Quantum Leap (third respondent). The first complainant in particular also needed to draw from the investment to provide for her whilst she was not working. The first respondent earned commissions on the various deposits. At the inception of the investment statements were received indicating the stated growth. The first complainant contact the first respondent requesting the commencement of a withdrawal of 3% per month. This was then followed by statements indicating no growth on the investment. The rationale for this was that no trading had taken place to various factors. The complainants accepted the explanation. The complainants were then informed that they could not withdraw because the third respondent s had moved into bullion due to market volatility and that it is slower in nature and required more patience and that this position would be held into the new year. The complaints were then told that the price of gold had unexpectedly spiked and that they were forced to lock their gold position to avoid serious loss and that this could take quite a number of months to change. This meant that once again the first complainant could not withdraw. The first complainant then decided to consult with another investor and he informed her that severe losses were experienced by the respondents. The first complainant then flew to Johannesburg to meeting with the respondents and it was recommended that she withdrew what was left. The first complainant withdrew R and experienced a loss of R The second complainant withdrew R having experienced a loss of R The respondent s suggested that once a new investment scheme was set up all profits would be allocated to investors until losses are recovered. This never did materialise and thus the reason for the complaint. In reaching the determination the ombudsman looked at the profile of the complainants and drew the conclusion that they were people of modest means who made investments and savings in conservation financial products. The complainants were not high risk investors but yet their monies were invested as such. The first respondent was not licenced to deal in forex investments. Nor did the third respondent have a licence but operated under the then exemption. Further, the ombudsman, could find no record of advice which indicated to the complainants that they could lose all of their money with this type of investment. Further, the complainants could not tolerate such risk. Further, it was noted that there was a clear conflict of interest with the first and second respondent, Quantum Leap is run by Gary and although Wayne worked independently, he was also a director/manager of Quantum Leap. [The ombudsman referred to the

5 determination of: Ian George Buchanan Scott v Wayne Ashley Gray and Quantum Leap case no FOC 3617/06-07/GP] The respondent s claimed that in all their dealings they acted with due skill, care and diligence. The respondent s posed the question, what more is expected of the reasonable man? The ombudsman pointed out that the respondents are misdirected and that the test is; what would a reasonably diligent licensed FSP have done in respect of their clients needs? Important to note: That the complainants signed documents with disclosures explaining in a very technical way the concept of the investment does not suffice. The ombudsman pointed out that what the respondents had to do is explain the risks to the complainants in plain language. There was no evidence that this was done. In fact the complainants pointed out that if the risk had been explained to them they would not have invested their savings in this investment. The ombudsman s office found in favour of the complainants and that the respondent s failed to comply with the FAIS Act while rendering financial services. Further they had failed to make the necessary disclosures; they had failed to act with due skill, care and diligence at all times; they failed to act in the interest of the complainants amongst other things. They were found jointly and severally liable for the sustained loss. Godfrey Frederik Botha (1 st complainant), Elizabeth Helen Botha (2 nd complainant) and R&S Walsh Investment Consultants CC (1 st respondent), Ronald Walsh (2 nd respondent), Guy Robert Coleman (3 rd respondent) Case number: FAIS 06019/08-09/EC1 The complainants were a retired couple in the seventies. The 1 st respondent was a registered FSP whose licence had lapsed in The 2 nd and 3 rd respondents were key individuals and representatives for the 1 st respondent. The complaint was premised on the inappropriate advice given by the respondents to the complainants. They were advised to invest in aggressive and risky investments that were not suited to them. The complainants maintained that the riskiness of the investment was never explained to them and had it been they would not have invested as such. The respondents stated they did a risk profile for the complainants and an appropriate product was recommended. The Ombudsman noted that no record of this advice as kept. In terms of Section 9 of the FAIS code of conduct advice given to a client must be recorded. Section 9 not only requires that the advice be recorded, it refers to product[s] being considered, the basis of advice and reasons for why the product chosen was best suited for the client. In this instance there was no such records and further it would seem as if no information gathering had taken place.

6 The Ombudsman noted that the complainants were not experienced investors and were in fact cautious and sought out the respondent s advice because of their expertise. Further it was noted that the FAIS Act in section 8 talks about appropriate advice. In this regard section 8 (1) (a) of the Code requires that the provider take reasonable steps to seek from the client appropriate and available information to enable the provider to provide the client with appropriate advice. Added to this section 8 (1) (c) requires that the provider identify the financial product or products that will be appropriate to the client s risk profile and financial needs. Section 3 (1) (a) (iii) requires that the representations to the client be adequate and appropriate in the circumstances when seen against the knowledge of the client and section 7 (1) (c) (xiii) requires that these representations provide full and appropriate information as to any material investment or other risks associated with the product. Section 8 (2) demands that the provider take reasonable steps to ensure that the client understands in order to make an informed decision. In this instance the complainants could not make an informed decision. Did the respondents provide appropriate advice taking into the account the complainants circumstances? The Ombudsman found that the advice was not appropriate in that a high risk investment was not warranted. Further, the complainants were cautious and did not have investment experience. The ombudsman found that the fact that they were willing to go along with the high risk investment is indicative of their reliance on the advice. The respondents were held jointly and severally liable. The Trustees for the time being of Johnnie Pringle investment trust IT1280/2004 (complainant) and VAIDRO 173 CC t/a Vaidro Investments (1 st respondent), Andrea Moolman (2 nd respondent) Case number: FAIS 03795/12-13/ EC 1 This was a complaint arising from a failed investment made by the complainant in the now defunct Relative Value Arbitrage Fund, hereinafter referred to as RVAF, a fund that was managed and operated as a hedge fund - by one Herman Pretorius, (now deceased) - with no license of its own. Complainant s claim against respondent was based on the latter s failure to appropriately disclose the risks involved in investing in the scheme, which complainant believed at the time was totally legitimate. RVAF was promoted and sold as a hedge fund. The fund itself not only exercised complete control over the client s monies but also carried out all administrative and intermediary services. In the determination the following was noted: Section 7(1) of the FAIS Act which requires that; With effect from a date determined by the Minister by notice in the Gazette, a person may not act or offer

7 to act as a financial services provider unless such person has been issued with a license under section 8. In terms of section 7(3) an authorised financial services provider may only conduct financial services related business with a person rendering financial services if that person has, where lawfully required, been issued with a license for the rendering of such financial services. In this instance the 1 st and 2 nd respondents were not licenced. In terms of section 7(3) an authorised financial services provider may only conduct financial services related business with a person rendering financial services if that person has, where lawfully required, been issued with a license for the rendering of such financial services. Section 8 (8) (b) of the FAIS Act requires that a licensee must ensure that a reference to the fact that such a license is held is contained in all business documentation, advertisements and other promotional material. Neither that of Abante, nor any other license was displayed. This should have immediately alerted respondent to the fact that she should make further enquiries. Sections 5 and 8A of the Discretionary FSP s Code which relate to the mandates and duties of hedge fund FSP s, detail the necessary documents to enter into an agreement with a hedge fund service provider and, despite these requirements, there is not a single mention of Abante Capital (Pty) Ltd in any such documentation. In this instance there was no evidence of a signed mandate. In order to ensure a client s understanding of the provider with which they are contracting, section 4 of the General Code requires, inter alia, that full particulars of the following requirements be provided in writing by the provider: 1. Section 4(1) (a) Name, physical location, and postal and telephone contact details of the product supplier; 2. Section 4(1) (b) (i) the contractual relationship with the product supplier (if any), and whether the provider has contractual relationships with other product suppliers; 3. Section 4(1) (c) the existence of any conditions or restrictions imposed by the product supplier with regard to the type of financial products or services that may be provided or rendered by the provider; 4. Section 4(1) (b) (ii) names and contact details of the relevant compliance and complaints departments of the product supplier; 5. Section 4 (1) (d) Where applicable, the fact that the provider- (i) directly or indirectly holds more than 10% of the relevant product supplier s shares, or has any equivalent substantial financial interest in the product supplier;

8 (ii) during the preceding 12 months received more than 30% of the total remuneration, including commission, from the product supplier, and the provider must convey any changes thereafter in regard to such information at the earliest opportunity to the client. The ombudsman further noted that there was no document that could be found which makes mention of the client s investment objectives or the approval of the guidelines and trading philosophy of the hedge fund in the manner as required in terms of section 8A (4). Section 8A (4) is further reinforced by section 8A (2) which requires that a hedge fund FSP must before rendering any intermediary services to a client that requires such intermediary services in respect of a financial product governed by the Act, provide a written disclosure to the client in the format determined by the registrar, of the risks involved in a hedge fund. Section 8A (2)(b), specifically requires written confirmation of receipt of such written disclosure. Further the Ombudsman found that the respondent did not act with due care and diligence in terms of section 2 of the General Code. For all of the above reasons the Ombudsman found in favour the claimant. Daphne Auret Foster (complainant) and VAIDRO 173 CC t/a Vaidro Investments (1 st respondent), Andrea Moolman (2 nd respondent) Case number: FAIS 04296/12-13/ EC 1 Leon van der Walt and VAIDRO 173 CC t/a Vaidro Investments (1 st respondent), Andrea Moolman (2 nd respondent) Case number: FAIS 05938/13-14/ EC 1 Stephanie Neethling (Complainant) and VAIDRO 173 CC t/a Vaidro Investments (1 st respondent), Andrea Moolman (2 nd respondent) Case number: FAIS 04269/12-13/ WC 1 Similar facts and finding as above.